India Business Insights

India’s new Goods and Services Tax

After months of anticipation and many challenges, India’s Goods and Services Tax (GST) was rolled out at midnight on 30 June 2017. GST is expected by many to bring double-digit economic growth closer to reality.

The journey to integrate India’s multi-layered indirect tax structure into a single tax regime has taken more than 17 years since it was first proposed.

GST is expected, by many, to bring double-digit economic growth closer to reality. The considerable challenges of dealing with multiple taxes under the current system will be replaced by a simple tax regime. Digitisation and the consequent transparency of commercial transactions will make it significantly easier to do business in India. 

GST has certainly given a boost to the job market, particularly for tax and technology professionals, as companies in many sectors rapidly put teams together to manage the transition.

Challenges and benefits ahead

In the coming months, businesses will no doubt experience some ‘GST blues’ as the entire indirect tax structure of the country is revamped. While the new GST law adopts some concepts from the current regime, it also introduces some fairly new concepts that will be more challenging to adopt.

There is considerable concern among taxpayers over the new compliance requirements and the complexity of a tax structure comprising rates ranging from 5% to 28%.

There are, however, expected to be much-heralded long-term benefits of GST. As promised, the government has incorporated provisions into GST law to ensure free flow of credit. So while GST may cause some inconvenience to ordinary people and a step change for traders and businesses, in the long-term GST should have a positive impact on everyone.

Impact on overseas investors

A fairer, simpler, more predictable and equitable tax regime should encourage investment in important sectors of the Indian economy, making it easier to do business in the country and attracting more domestic and foreign direct investment.

UK and other overseas investors in India will no doubt hope for a smooth and fair implementation of GST. Businesses may also expect to see further reductions in corporate tax rates and basic customs duty. The productivity of many business entities is expected to increase under the GST regime by allowing various financial departments to be consolidated into a single GST department.

GST is expected to lower tax and logistics costs, improve profitability and increase investment, thus reducing inflationary pressures. The overall impact should include better allocation of resources, improved efficiency of domestic production and increased exports, resulting in stronger growth.

GST will benefit the movement of products. For example, consolidation of warehouse facilities (since businesses won’t need warehouses in various states) easier movement of heavy vehicles, lower duties on house building materials and lower procurement costs for industrial manufacturing.

The oil and gas and alcohol/beverages sectors will see a negative impact as they are excluded from the GST law for the time being. This in turn could lead to blockage of credit for these sectors, leading to higher prices. Tobacco products could also be negatively impacted due to the imposition of product-specific taxes known as cess.

Challenges for overseas investors

There are a number of implementation challenges surrounding GST, including legal and regulatory complexity, the prospect of retrospective taxes and operational issues such as updating IT systems in line with GST law; and ensuring vendors are GST compliant. These factors may impair the anticipated impact on the ease of doing business in India.

UK and other overseas investors should also consider the practical challenges they may face in the GST regime. Procurement from unregistered suppliers will be a cumbersome task, for example, since registered investors will be required to undertake compliance procedures on behalf of such unregistered suppliers.

Furthermore, the government has failed to deliver on some key GST promises, such as single registration and a common credit pool for central taxes. Investors will be required to register for GST in every state from which they make taxable supplies. This in turn will lead to increased compliance requirements as the quantity of business grows, although with the launch of a digital platform, this will likely only be a challenge in the short term.

One of the intentions of the GST law is clearly to make inbound investment in India simpler. Digitisation will be the key to ensuring greater transparency in doing business and communicating with statutory departments.